Didier Laussel, Maxime de Montmarin, and Ngo Van Long

"Dynamic duopoly with congestion effects"
JEL codes: L13
Keywords: oligopoly, differential games, Markov perfect equilibrium

Abstract: We analyze duopolistic competition between horizontally differentiated firms selling durable goods or services subject to congestion. At each point of time, new customers buy one unit of the commodity from one of the firms, by comparing present prices and future congestion rates. We study the linear Markov equilibrium of this game which exists and is unique when firms are not too different. The existence of negative consumption externalities is shown to soften the price competition. Moreover, we show that the firm with the larger capacity has, at the steady state, a larger market share, a higher price, and a lower congestion rate. The price of an entrant decreases gradually after entry, while the price of the incumbent rises. The speed of convergence to the steady state is faster, the stronger is the congestion effect.

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